Unemployment Crises

Nicolas Petrosky-Nadeau and Lu Zhang ()

No 2013-E5, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: A search and matching model, when calibrated to the mean and volatility of unemployment in the postwar sample, can potentially explain the large unemployment dynamics in the Great Depression. The congestion externality induced by matching frictions causes the unemployment rate to increase sharply in recessions but to decline gradually in booms. The frequency, severity, and persistence of unemployment crises in the model are consistent with U.S. historical time series. An accurate global solution is critical for deriving the nonlinear dynamics. Loglinearization understates the mean and volatility of unemployment, overstates the unemployment-vacancy correlation, and overlooks impulse responses that are an order of magnitude larger in recessions than in booms.

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Related works:
Working Paper: Unemployment Crises (2013)
Working Paper: Unemployment Crises (2013)
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